Commodity Futures Trading Comm'n v. Am. Precious Metals, LLC

• Citation: 845 F.Supp.2d 1279
• Decision Date: 30 September 2011
• Docket Number: Case No. 11–61075–CIV.
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. AMERICAN PRECIOUS METALS, LLC, Harry Robert Tanner, Jr., and Sammy J. Goldman, Defendants.
• Court: U.S. District Court — Southern District of Florida

845 F.Supp.2d 1279

COMMODITY FUTURES TRADING COMMISSION, Plaintiff,

v.AMERICAN PRECIOUS METALS, LLC, Harry Robert Tanner, Jr., and Sammy J. Goldman, Defendants.

Case No. 11–61075–CIV.

United States District Court,

S.D. Florida.

Sept. 30, 2011.

Carlin R. Metzger, Jennifer E. Smiley, Joseph A. Konizeski, Rosemary Hollinger, Stephanie Reinhart, U.S. Commodity Futures Trading Commission, Chicago, IL, for Plaintiff.

Lawrence Brett Lambert, Law Office of Lawrence B. Lambert, Miami, FL, Marc Aaron Wites, Jonathan Stephen Burns, Wites & Kapetan, Lighthouse Point, FL, for Defendants.

FINAL ORDER OF DISMISSAL

WILLIAM J. ZLOCH, District Judge.

THIS MATTER is before the Court upon Defendants' Memorandum Of Law In Opposition To Plaintiff's Motion For Preliminary Injunction (DE 20), which the Court construes as a Motion To Dismiss pursuant to Fed.R.Civ.P. 12(b)(6), oral argument at the preliminary injunction hearing held on May 24, 2011, and the supplementalbriefing filed by the Parties. See DE Nos. 40, 45, & 46. The Court has carefully reviewed said Motion and briefing, the entire court file and is otherwise fully advised in the premises.

Plaintiff Commodity Futures Trading Commission (hereinafter “the CFTC”) initiated the above-styled cause with the filing of a two-count Complaint (DE 1), alleging in Count I that Defendants violated Section 19 of the Commodities Exchange Act (hereinafter “the CEA”), 7 U.S.C. § 23, and Rule 31.3 thereunder, 17 C.F.R. § 31.3, by making fraudulent misrepresentations to customers while marketing precious metals. In Count II, the CFTC alleges that Defendants violated Section 19(b) of the CEA, 7 U.S.C. § 23(b), by engaging in transactions involving palladium. By its Complaint (DE 1), the CFTC has properly raised a federal question and thus this Court has subject matter jurisdiction over this cause pursuant to 28 U.S.C. § 1331. However, the Parties dispute whether the CFTC has regulatory jurisdiction under Section 19 of the CEA.

On May 24, 2011, the Court held a preliminary injunction hearing regarding the CFTC's Motion For Preliminary Injunction (DE 6). At that hearing, the Court informed the Parties that it was treating the Defendants' Memorandum Of Law In Opposition To Plaintiff's Motion For Preliminary Injunction (DE 20) as a Motion To Dismiss because Defendants alleged therein that the contracts at issue do not fall within the CFTC's regulatory jurisdiction under Section 19. The Court also informed the Parties that it would be denying that Motion (DE 20), and would enter an order setting forth its reasons later.

For the reasons expressed herein, the Court will vacate its prior ore tenus ruling denying Defendants' Motion To Dismiss (DE 20), and will grant Defendants' Motion To Dismiss (DE 20).

I. Background

The following facts are taken from the Complaint (DE 1) and the CFTC's Motion For Preliminary Injunction (DE 6). Defendant American Precious Metals, LLC (hereinafter “APM”) is a telemarketing firm purporting to sell physical gold, silver, platinum and palladium to customers through what it describes as its “leverage program.” Since at least July of 2007, APM has allegedly elicited more than $37 million from its customers. Defendant Harry Robert Tanner, Jr. is the Managing Member of APM, and together with Defendant Sammy J. Goldman, controls the daily operations of the firm.

Acting at the direction of Defendants Tanner and Goldman, APM's agents and employees solicited customers through telephone, mail, and APM's web-sites. These APM representatives told customers that:

(1) APM sells physical precious metals to customers on a leveraged basis; (2) APM arranges for a loan to the customer through a second company named Global Asset Management (hereinafter “GAM”), which purportedly lends up to 80% of the funds for the purchase of physical precious metals; (3) customers' physical precious metals are stored in an independent depository; and (4) interest accrues on funds lent to the customer by GAM.

DE 1, ¶ 2.

However, the CFTC alleges that:

In fact, APM [did] not buy, sell, or store physical precious metals ... and no actual financing [was] ever provided. Instead, APM record[ed] each customer's transaction on paper, [took] a hefty commission of 40% of the customer's funds, [pooled] the customer's remaining funds together with funds received from its other customers, and periodically [sent] those pooled funds to GAM. In turn, GAM pooled the funds received from APM with funds received from similar boiler rooms, and [sent] a portion of those funds to accounts in GAM's name with three London-based firms, where it [held] positions on margin in off-exchange metals derivatives. In the meantime, APM actively conceal[ed] its fraud, in part by creating and sending customers false trade confirmation statements that reflect[ed] the purchase of actual, physical precious metals.

DE 6, p. 6.

APM customers signed agreements with GAM to supposedly invest in precious metals. The GAM agreements provided for initial five year terms, followed by automatic renewals of successive five year terms. See DE 6–14, p. 35; DE 24–2, p. 37.

By this conduct, the CFTC alleges, inter alia, that Defendants committed fraud in violation of Section 19 of the CEA, 7 U.S.C. § 23, and Rule 31.3 thereunder, 17 C.F.R. § 31.3. In their Motion To Dismiss (DE 20) and their Supplemental Brief (DE 40), Defendants argue that the transactions at issue do not fall within the CFTC's regulatory jurisdiction under Section 19 because they last fewer than ten years, and therefore are not “leverage contracts” as defined by the CFTC's Rule 31.4z(w), 17 C.F.R. § 31.4(w). In response, the CFTC argues, inter alia, that Rule 31.4(w) only applies to a subset of a broader class of “Section 19 transactions.” See DE 45. Thus, the CFTC asserts that it still has jurisdiction over contracts it determines are the functional equivalent of leverage contracts, as well as contracts it determines are marketed or managed in substantially the same manner as leverage contracts. Id.

II. Analysis

A. Chevron Deference

When an agency construes a jurisdictional provision of a statute it is responsible for administering, courts have regularly resolved the dispute by applying the framework established in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). See, e.g., Coeur Alaska, Inc. v. Southeast Alaska Conservation Council, 557 U.S. 261, 129 S.Ct. 2458, 2469, 174 L.Ed.2d 193 (2009); see also Cavert Acquisition Co. v. NLRB, 83 F.3d 598 (3d Cir.1996) (implicitly applying Chevron );but see Northern Steel Supply Co. v. Sec'y of Labor, 294 F.3d 844 (7th Cir.2002) (declining to apply Chevron ). In Chevron, the Supreme Court held that, “[t]he power of an administrative agency to administer a congressionally created ... program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.” Chevron, supra, at 843, 104 S.Ct. 2778 (additional citation omitted). Thus, Chevron established a principle of judicial deference to an agency's construction of a statute it is responsible for administering. As the Supreme Court has held, “Chevron's premise is that it is for agencies, not courts, to fill statutory gaps.” Nat'l Cable & Telecommunications Ass'n v. Brand X Internet Svcs., 545 U.S. 967, 982, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005). Chevron applies to the instant case because the CFTC is construing a jurisdictional provision of the CEA—a statute it is responsible for administering. See Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 13 L.Ed.2d 616 (1965) (noting that Congress has charged the CFTC with administration of the CEA). The Court thus turns to examine whether judicial deference to the CFTC's construction of the CEA is warranted here.

The Chevron Court established a two-part inquiry for determining whether judicial deference to an agency's statutory construction is warranted. First, the district court must determine whether Congress left a statutory “gap” for an agency to fill via administrative rule-making. A statutory gap exists where Congress has not “directly spoken to the precise question” at issue, see Coeur Alaska, supra, at 2469 (internal quotation omitted), meaning that the statute at issue is silent or ambiguous as to a particular matter.

Here, the language of Section 19 of the CEA demonstrates that Congress did not directly speak to the precise question of how a “standardized contract” is defined.¹ Section 19(a) provides that:

Except as authorized under subsection (b) of this section, no person shall offer to enter into, enter into, or confirm the execution of, any transaction for the delivery of any commodity under a standardized contract commonly known to the trade as a margin account, margin contract, leverage account, or leverage contract, or under any contract, account, arrangement, scheme, or device that the Commission determines serves the same function or functions as such a standardized contract, or is marketed or managed in substantially the same manner as such a standardized contract.

7 U.S.C. § 23(a). In turn, Section 19(b) states:

Subject to paragraph (2), no person shall offer to enter into, enter into, or confirm the execution of, any transaction for the delivery of silver bullion, gold bullion, bulk silver coins, bulk gold coins, or platinum under a standardized contract described in subsection (a) of this section, contrary to the terms of any rule, regulation, or order that the Commission shall prescribe, which may include terms designed to ensure the financial solvency of the transaction or prevent manipulation or fraud.

7 U.S.C. § 23(b)(1). Thus, Congress left a gap—or ambiguity—for the CFTC to fill in the exercise of its own discretion.

Under Chevron's second prong, courts must resolve a statutory ambiguity by “look[ing] first to the agency regulations, which are entitled to deference if they resolve the...